Doubling The Mortgage Deduction to Help the Troubled Economy and Housing Market

by David Ning · 21 comments

double the deduction on mortgage interest on our taxes

I read in the paper on Sunday where an article suggested that instead of all the silly bailout, we ought to pass legislation to let homeowners deduct $2 for every $1 of interest that they pay. It’s a creative way to help the troubled housing and financial markets and one that I’d like to discuss today.

The plan is simple. Currently, those who are eligible can take the interest portion of their mortgage payments as tax deductions. So if you paid $10,000 in mortgage interests for the year, you will get a $10,000 deduction on your taxes. The proposal is simply that instead of $10,000, you get $20,000 in return. The benefits would be:

  1. Lowers the borrowing costs for home ownership (the columnist’s rough calculation estimates that a 6% mortgage effectively becomes 3%)
  2. Lower taxes for every kind of mortgages (long or short term, fixed or adjustable)
  3. Puts money directly in mostly middle class people’s hands, where it could be spent (instead of banks getting the money and using it for anything but lending it out)
  4. Might convince renter’s to buy a home because this favors the home side of the owning vs renting argument considerably
  5. Possibly reduce foreclosures as there’s an added incentive for financially strapped owners to do more to pay their mortgages and keep their home
  6. Sounds like it’s unaffordable but it should only cost $80 billion a year, compared with 10 times the amount we’ve already spent bailing out other firms like AIG

What I Think of This Plan
Reading this article really caught my attention because this is much more creative than what we are seeing from the government so far.  I think that congress should setup a suggestion box for people to submit ideas as to how we can help our current crisis.  Sure, most of us are never going to produce something sophisticated enough, but many of us can write something comparable to a 3-page proposal that our Treasure Secretary did, not to mention that some suggestions might spark other ingenious ideas.

Going back to the plan though, it’s great because:

  1. I completely agree with the fact that it will help promote home buying.  I need to do a more serious calculation before I commit, but at first glance I will be buying a house if this bill passes.
  2. This will artificially make me feel more wealthy, and I will spend more (unfortunate psychological flaw of mine and shared by most other people in the world but it’s good for our economy)
  3. I will directly benefit from this.  On a personal level, it will end up giving me so much money through the years.

For our country as a whole however, I do see a few issues:

  1. While $80 billion is much less than the money that we’ve spent with other plans, it is $80 billion that is totally not recoverable.  How much we can recover from the bail out money for the financial institutions are debatable, but we will get some of this back.
  2. The $80 billion is a “per year” expenses, which quickly adds up.
  3. This plan promotes excessive lending.  If I could borrow money at effectively 3% a year, I’m going to borrow as much as I can and leave my savings/investments alone because I can make my money work for me at more than 3% per year.
  4. Excessive borrowing is never good.  (For examples, look around you, they are everywhere)

What Do You Think?
Do you think this is a good idea? If you do, how should we promote it to the right people who can get this through? Let us know what you think.

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{ read the comments below or add one }

  • Cally says:

    The best thing the government could do for the economy, homes and american familys is to change the individual tax code so that it is based on and encourages consumption and savings not debt. The current system is regressive which has the country’s economy stalled due to many mandated needs where the cost has been raised without any competetive alternatives. These are huge rises in gas, energy, education and health care costs, which you have to pay for long before thinking about before owning a home. There is few or no choice alternatives, therefore the supply and demand or free enterprise system has been eliminated considering these must haves. The government steals a big part of your paycheck 1st thing, then you must also pay for the unchallenged high priced necessities. This leaves most consumers in a big stall with no longer having extra money to ignite consumer spending which polarizes the economy. This is why we should fund the government based on consumption tax instead of the out dated payroll tax. People will spend if you allow them to, then the cost of government services or debt would balance itself instead of being out of whack. The accepted method of stealing from people’s paychecks to fund the government is the root cause. This 100 year old strategy is no longer effective or feasible to allow the economy to grow. It has been minipulated, filled with loopholes, favoring special interests more for the rich or political sponsers, never helping middle class, which is the bulk of consumers or the bloodline of the American Economy. This is what needs changed to save all the other slices in trouble.

  • CR Home Mortgage says:

    Now some politicians are seriously trying to eliminate any mortgage deduction.

  • Andrea says:

    Todd –

    A few thoughts …

    1. If you can’t afford to pay your mortgage, doubling the deduction won’t make a difference. It also doesn’t do renters a lick of good, since property owners aren’t likely to pass that savings through.

    2. Tightened lending standards are of course a necessity … but I don’t think it’s quite that simple.

    3. The people in the lowest income tax brackets don’t pay income taxes, so cutting the payroll tax in half doesn’t do any good.

  • todd says:

    Here is a three step plan for fixing this mess…

    1) Double the home mortgage deduction for three years. This would lead to a decrease in forclosures as homeowners have double the incentive to pay their mortgage.
    2) Tighten lending standards to avoid future so-called sub-prime mortgage fiascos. Banks and other lending institutions are already doing this.
    3) Cut in half the payroll tax for three years. This lets the lowest income earners keep more of their income which they will use to pay their mortgages. This also allows renters an easier time of paying their rent.

    Does this cost more than the 700B for TARP I and the 800B for the “stimulus” package? I dont know. Probably not. Besides, it would actually work.

  • Ditech Home Loans says:

    Excessive borrowing on a mortgage should not be a problem, because borrowers would still have to qualify at the mortgage note rate, not the effective tax rate.

  • Danny says:

    You really think our government is going to listen to the people. I have yet to see one thing the government has done yet besides weaken our dollar. Essentially making us all less wealthy.

    I really do like the idea of getting ideas from the people, I am sure there a lot smarter people in our society than what is in our government.

  • Jon Kepler says:

    Marci, unfortunately, I can’t see this tax adjustment ever making it into the commercial sector.

  • CD Rates Blog says:

    Erica, I’ve got to get the kids so forgive me if this is brief and not well organized.

    I read two chapters, “The Broken Window” and the following one regarding Destruction”

    My problem is it seems to portray a zero-some game and we should just live in mud huts. Of course I should read the whole thing, because I’m sure other ideas come into play in other chapters

    Got to one. But I do want to finish this discussion. cd :O)

  • marci says:

    It seems like one of the biggest problems with the USA economy right now is buying so much on credit … too much on credit.

    In order for the economy to become more stable, there should be more people heading towards that debt-free status – ie, nothing on credit, nothing owed.

    I think the extra tax break would actually DISCOURAGE people from paying off their homes. Not a good idea in my book as it doesn’t promote that free of debtness that the economy needs to recover.

    So, since my home is free and clear, if I go borrow the money as a home equity loan, put the money into savings and withdraw it for the paybacks, will I be able to recoup all the money back with the additional interest deduction? That’s the only way it would do me any good 🙂 Could I make money at this? LOL.

    Re: Renters – theoretically, they should get a break in lower taxes IF the landlord would pass thru the reduction in expenses…. however, that might not happen in all cases 🙁

  • @CD Rates Blog: For an excellent rebuttal of your point, read about the “broken window fallacy” at http://www.hacer.org/pdf/Hazlitt00.pdf or Google for it and find the link on mises.org. (Homeownership doesn’t help the economy that way, either. Another common fallacy.)

    @Kathryn: You wrote “To get more money circulating, we have to have more money circulating.”

    To get more money circulating, we need to let fractional reserve lending work and encourage people to save, not to deficit spend (which is what this would do.) Our government has dropped interest rates to effectively 0, once again encouraging people to spend instead of save. But every dollar that is saved has at least as much positive effect as a dollar spent. That’s why this won’t help. Encouraging saving, and letting lending work properly instead of force-feeding banks money, is the only thing that will help us.

    -Erica

  • Kathryn says:

    What an inventive idea. I don’t mind if the mortgage interest credit is doubled across the board and it’s not because we live in a rich neighborhood. Our house cost $82.5K at closing. I think it’s a good idea because it is something that actually helps people rather than corporations (yes, I know, corporations can own property as well … that’s not the point). To get more money circulating, we have to have more money circulating. The Fed printing more money only dilutes the value of the money in all our pockets. This has the potential to boost homeowner’s and the economy in a very real way. Would I double the mortgage interest credit allowed forever? No, but five years would do a lot to help those on my block … maybe even yours.

  • CD Rates Blog says:

    On the surface it sounds nice, but fraught with too many dangers that have been covered by others. In addition, what can be given, can be taken. So let’s say you get double for 3-years and you become use to the lower taxes. Then in year 4, your taxes go up. The current environment has proven that the majority of people don’t think that far ahead. The majority spends the extra instead of saving. That needs to change. A good point that Erica pointed out.

    Erica, you mentioned that Homeownership doesn’t directly spur the economy. I believe you may be missing the money that title companies, brokers, and banks make for one. Secondly, depending on the age of the house it helps, Hardware, Blinds, Landscaping, Appliances, Bedding, Paint, etc.

    cd :O)

  • Andrea says:

    I don’t like it.

    1. Although I don’t necessarily mind that it’s an across the board benefit for homeowners, I don’t see why someone making $500,000 who owns a $2,000,000 home needs another tax break. As stated by other commenters, I think this would just stimulate more borrowing, which isn’t necessarily a good thing.
    2. What about renters? They don’t get any benefit from this.
    3. Speaking of renters, maybe the article covers this and you just didn’t mention it here, but if this same benefit applies to second homes, what are the odds that the savings will be passed on to renters? I think we know the answer to that one …
    4. I really don’t think it will help all that much. It probably doesn’t adequately address month to month cash flow issues for people who are struggling to meet monthly payments.

    I still think what needs to happen is a massive, all at once readjustment of mortgage values.

  • Philip says:

    “incorporate a stimulus check to homeowners for energy efficiency upgrades to their dwelling”

    This is included in the bailout package, you will get deductions for some home improvements such as those you mention. They will only start for 2009, so don’t do it in 2008, wait till January.

  • Justin @ FixThePig says:

    I’m not sure that I really like the idea of having this be an annual program. The cost of a program like this would be extremely high and if left as a permanent tax law could have major financial implications. I do think this could be a great idea for 2008 tax returns as part of a 1 time stimulus act.

    Recently I wrote on my blog that we should also incorporate a stimulus check to homeowners for energy efficiency upgrades to their dwelling. ie new windows, insulation, furnace, etc. This would spur contractor work and help reduce our use of energy.

  • Philip says:

    “The proposal is simply that instead of $10,000, you get $20,000 in return”

    From my understanding, you get this to reduce earned income, if you pay $10,000 in interest all that saves is your tax bracket times that amound. so extimate 1/4 of that amound. So instead of $2500 in taxes off, you get $5,000, still not bad, but not as good as you were pointing out. This would lead to a benefit for the wealthy because they have higher tax brackets, and therefore would save more.

    I am not sure if or what the limit is on mortgage interest deductions.

  • Hi David,

    This article presents a common fallacy. Unfortunately, that fallacy has been passed on by many in our government.

    The fallacy says that a dollar spent helps the economy, but a dollar saved doesn’t.

    Nothing could be further from the truth. When you save money, that money is either lent out through fractional reserve lending (if you save at a bank) or invested into a company (if you invest in corp bonds or stocks.) You can even invest in our government…but ANY dollar saved rather than spent has a positive effect on our economy.

    For our economy to work properly, we need savings and spending in balance. Deficit spending helps NO ONE. Right now, we are so far out of whack that it will take years of saving to bring us back.

    This proposal pushes us more out of whack and encourages deficit spending, which doesn’t help anyone. It also encourages homeownership, which doesn’t directly benefit our economy. The one thing that will benefit our economy is investments to improve productivity, and therefore, improve GDP. Anything else is a waste.

    Please read “Economics in One Lesson.” It is free (in the public domain) and a fascinating read. The author lived through the Great Depression and has some amazing insights.

    Here’s the link to the free version: http://www.hacer.org/pdf/Hazlitt00.pdf (Of course, you can buy it on Amazon too. I picked up a hard copy on Paperbackswap.)

    In particular, thumb through the chapter on “The Assault on Saving” starting on page 190 to understand why this proposal, nor any based on deficit spending, won’t help our economy.

    -Erica

  • David,

    I think the concern that you and Arohan raise could be controlled by building in a term expiration, say 3 years or so. After that, interest deductions reset. I think that would make people think twice about cashing our their equity for the short term for a relatively minor tax break. I’m sure not everyone would think long term, but enough might to avoid calamity. Besides 3 years isn’t that long term – just enough to help soften the bottom and maybe start things moving in the right direction again.

    David, I like the fact that this proposal would favor ARM or interest heavy loans. I think those are the people who probably need the most help, and they may not be able to refinance if they’re under water.

  • MoneyNing says:

    Oblivious: Definitely a great idea but I’m not sure if the flood of suggestions will be at a controllable level for government to intelligently sort out.

    Arohan: It will definitely increase the leverage in the country (I made a similar point in the article). However, increased leverage is sometimes needed in our country as long as it’s controlled. Maybe not in a personal level but definitely in the business level.

    I’m sure the government will be happy to lower taxes but they can’t because of our huge deficit and all our promises. I’m just afraid that eventually, the US government will turn into something like the automakers (once great, but can’t compete anymore because they have to deal with huge benefit packages).

  • Arohan says:

    Hmm, it is creative alright. But let me point out a few possible drawbacks

    – If I get twice the current tax deduction on the mortgage interest, I may be inclined to pay down the principal slower so I can maximize my deductions over the years. This will likely make adjustable or interest only loans more preferable to fixed

    – If I do have equity built up in my home, I may want to cash it out and spend it as the incentive to do that is now greater. I think this will make the mortgage leverage worse and not better

    But I think the benefits you pointed out may outweigh these concerns so ultimately it may be a good thing.

    Besides, less taxes are always good. I think ideas like this along with a reduction in corporate taxes would do wonders for the economy

  • I really like anything that gets people more involved with what our government is doing. We have a lot of smart taxpayers. Why not tap them for their input?

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